The U.S. national debt is one of the greatest problems facing the United States, demanding fair and reasonable action to address this issue. The national debt comprises $12.6 trillion. (Hall) The debt held by the public will increase from 63.6% in 2010 to 68.6% in 2011. (OMB 146) The debt held by the public will increase to 77% of the GDP by 2020. (OMB 146) The federal deficit is another estimated $1.27 trillion for FY 2011, which is 8.3% of the GDP down from 10.6% for FY 2010. (OMB 146) This number does not include the unfunded Social Security and Medicare liabilities.
A high national debt is harmful to the United States, because high levels of government borrowing can reduce domestic investment, lower future incomes, raise interest rates, and spur inflation. They can damage the U.S. economy as wages can’t keep up with the rising prices, and borrowing to purchase a house can be prohibitively high (Ettlinger and Linden 1) A high national debt also poses a high opportunity cost on the government, because it reduces the scope of government investment as high interest rates take up a larger share of the federal budget. (Ettlinger and Linden 5-7) We currently spend $250 billion in debt service for FY 2011. This amount will increase to $912 billion in FY 2020 (OMB 146) Default on the interest payments on the national debt will yield in less domestic and international credit resulting in hyperinflation and/or an economic downturn (Samuelson). The U.S. national debt is a growing burden for the taxpayers, businesses, individuals and the U.S. economy and is largely caused by the economic recession resulting in a massive stimulus package and financial rescue packages for major banks and automakers, the fiscal policies of slashing taxes and increasing certain entitlement spending and military spending as a result of the wars in Afghanistan and Iraq. (Ettlinger and Linden 6)
In order to understand the budget problem one has to understand the federal budget. The current deficit is caused in large part by the economic crisis that began in 2008. However high the deficit may be it is very difficult to slash spending at this point (“The Truth About the Deficit” 1-3). The poor state of the economy forces the government to increase spending to prevent job cuts or create new jobs, and restore demand and investments. President Obama has announced to create 3 million jobs in a two year time frame. (Montgomery) Indeed, according to the Office of Financial Management, the American Recovery and Reinvestment Act, also known as the stimulus package, has saved 633 jobs in Clallam County and 114 jobs in Jefferson County. (Gottlieb) The administration has said that 100 days after the passage of the Stimulus Act 150,000 jobs have been created or saved (Lambert). The stimulus package cost $787 billion that comes on top of the national debt. However, the effects of the stimulus package still need to be evaluated. 75% of the stimulus money will be deployed by the end of 2010 (Francis) The Obama administration has said that the stimulus is the right medicine to put the economy back on its feet, whereas Republicans attacked the spending as ineffective. (“Federal Budget Deficit on Track to Surpass Last Year’s Record Shortfall.”). Without the stimulus package the weak private sector demand would set in motion a negative, self-enforcing spiral of lack of demand- for goods services, and new employees- that leads to ever deepening economic weakness. ( “The Truth About the Deficit.”)
On top of the stimulus package, the federal government has invested around $204 billion in bank bailouts, and has recuperated around $96 billion. (“Treasury’s Bank Bailout List – CNNMoney.com.”) The expected funding for banks in so-called TARP funds (Troubled Asset Relief Program) that are meant to purchase the bank’s bad assets goes up to $550 billion, but the Treasury Department has reduced this estimate to $400 billion. (U.S. Department of the Treasury “Financial Stability Plan – One Year Later.”) Simon Johnson, a senior fellow at the Peterson Institute for International Economics, has estimated that the government might spend up to $4 trillion for all the bank bailouts (Barr). The federal bailouts stem from the hypothesis ‘too big to fail’. That means that the financial institutions encompass so much money that their breakdown might cause further economic turmoil. For example, Fannie Mae and Freddie Mac own or guarantee more than half of the nation’s worth of home mortgages (Goodman 1). Without the bailout for the mortgage lenders the whole system for American finance would have collapsed (Goodman 1)
The automakers received another share of government’s help. General Motors and Chrysler received more than $162 billion from the federal government to prevent bankruptcy (King and Terlep). The government also took over 60% of the shares of GM, even though the administration announced that this measure is only temporary. (King and Terlep) The federal deficit and the increase of the national debt has been the result of the government response to the economic crisis, requiring huge stimulus and bailout spending.
There are structural spending issues that led to the fiscal problem. On the spending side, there are two different types of spending. They include discretionary spending and mandatory spending. The former one is spending that can be altered without change in the law, including education or transportation spending. They have to be annually appropriated. (C-Span “Discretionary Spending”) Discretionary spending for FY 2011 was $1.3 trillion (OMB 146). But discretionary spending is not a major problem, even though the administration announced a spending freeze in discretionary spending (Burman; Calmes “Obama To Seek Spending Freeze To Trim Deficit”). The most expensive fiscal obligation lies in mandatory spending that is spending not controlled by Congress and can only be altered by a change of law, including Social Security and Medicare. (C-Span “Mandatory Spending”). In fact, health care costs in general have been attributed to sky-rocketing government expenditure (Ettlinger and Linden 11) The demographic shift involving 74 million baby boomers (born between 1946-1964) moving into retirement plays its part to increase entitlement spending (Gallagher). Social Security costs $731 billion in 2011, and Medicare costs another $492 billion. (OMB 149). Social Security expenditures will escalate to $1.2 trillion by 2020, and Medicare expenditures to $957 billion. (OMB 149) A Social Security and Trustees Report in 2009 states that Medicare’s annual costs will rise from 3.2% of the GDP in 2008 to 11.4% of the GDP in 2083. (“A Summary of the 2009 Annual Reports”). Social Security has unfunded liabilities of $17.5 trillion, whereas Medicare’s unfunded liabilities are $89 trillion. (Villareal) Unfunded liabilities are the difference between current and expected future benefits and the revenues or tax collections to fund those benefits. The Hospital Insurance Trust Fund derives from employee’s and employer’s payroll tax and pays for Medicare Part A (hospital expenses). It will exhaust in 2017 meaning that there won’t be any assets to fund Medicare. (“A Summary of the 2009 Annual Reports”) Medicare Part B (doctor’s bills) and Part D (prescription drugs) are funded via general government revenues and charges for enrollees, but they will grow more expensive over time (“A Summary of the 2009 Annual Reports”). The Old Age and Survivors and Disability Insurance Trust Fund that funds Social Security will exhaust in 2037 (“A Summary of the 2009 Annual Reports”). The federal government has passed another major entitlement program, which is the Medicare Prescription Drug plan that will add $1.2 trillion in costs over the next decade (Connolly and Allen). Congress has passed health care reform into law in March 2010 that will cost $940 billion over the next decade, but will reduce the number of uninsured by 32 million. (“Health Care Reform Bill: Cost, Details, Changes Released”). This plan is partly financed by a Medicare payroll tax increase for incomes above $200,000. (Viard and Roden). House Speaker Nancy Pelosi has also announced to cut unnecessary spending in Medicare to help pay for the reform. (“House Speaker Nancy Pelosi on the Health Care Bill”) The health care bill would save the taxpayers $130 billion in the next decade and $1.2 trillion in the second decade. (Chaddock) The structural entitlement spending programs Medicare and Social Security have significantly contributed to the growth in national debt.
The federal government has also invested a lot of funds in defense spending. The Department of Defense has requested $708 billion for FY 2011 out of which $548.9 billion is reserved for the base budget that is used for procurement, maintenance, personnel and other expenses. (U.S. Department of Defense, Chapter1). $159 billion is allocated for Overseas Contingency Operations that funds the U.S military involvement in Iraq and Afghanistan (U.S. Department of Defense, Chapter1). Through FY 2010 the United States has spent $1.05 trillion on the wars in Iraq and Afghanistan (“Cost of War” ). This is well above the official White House estimate of $50-60 billion for the War in Iraq in 2002. (Bumiller) According to the economists Joseph Stiglitz and Linda J. Bilmes, the war in Iraq will cost around $3 trillion in total (Davies). Stiglitz and Bilmes attribute the high costs to military personnel, the heavy use of expensive contractors hired to work in Iraq, the reconstruction funding for rebuilding civilian buildings, the procurement costs for military supplies, the training and equipment of Iraqi soldiers and security forces, the care for wounded veterans and their disability and health care benefits, the veterans reduced productivity, dishonest accounting strategy made by the Bush administration, and the interest on the national debt. (Davies; Stiglitz and Bilmes). Particularly the last point is important to point out. The Bush administration has added $4 trillion to the national debt over his 8 years in office (Knoller). The absence of the war in Iraq might have reduced the impact on the national debt. An important factor for the soaring costs is the heavy use of defense contractors, who have exceeded regular U.S. troops in number by 2007 (Miller) It costs the U.S. government a lot more to hire contractors than to deploy troops. (Pincus) President Obama has announced a complete withdrawal of U.S. combat troops from Iraq by the end of 2011 (MSNBC News Services). However, he has also ordered 30,000 more troops to Afghanistan, bringing U.S. troop strength to more than 100,000 (BBC News). The troop surge will cost another $30 billion (“Cost of War”). In FY 2010 the U.S. government already spent more in the War in Afghanistan than the War in Iraq (“Cost of War”). There has been an effort to end U.S. troop involvement in Afghanistan by the end of 2010, but a recent resolution proposed by Congress failed to approve this measure (ABC News). A report by the Center on Budget and Policy Priorities states that appropriations for all defense-related and security-related programs have increased more rapidly than the three entitlement programs Medicaid, Medicare and Social Security (Kogan 1). From 2001 to 2008 the entitlement programs shrunk by 2.4% to 43.5%, whereas defense and security programs expanded by 7.5% to 29.2%.(Kogan 1) The report also suggests that the vast increases of defense funding are only partly linked to the wars in Iraq and Afghanistan. The Department of Homeland Security that has been established in 2002 in response to the terrorist attacks in 2001 is in charge of security-linked programs and receives over $56 billion in funding for FY 2011 (U.S. Department of Homeland Security 3). The increasing defense obligations as a result of the wars in Iraq and Afghanistan have contributed to an increase in the national debt.
The tax policies of the previous administration have also contributed to the national debt. In the year 2010, the United States has a tax burden of 31.5% of the GDP, which is down from 34.75% in 2000. (Chantrill) The main reason for it has been the Bush tax cuts from 2001 and 2003. In 2001, Congress passed a $1.35 trillion tax cut, which is the largest tax cut since 1981 (Edwards). It included a reduction in the estate taxes, the expansion of a child tax credit, and a reduction in income tax rates from 15, 28, 31, 36, and 39.6 percent to 10, 15, 25, 28, 33, and 35 percent (Edwards). Another tax cut passed Congress in 2003, providing for a cut in top capital gains tax rate from 20% to 15%, and a cut in the top tax dividends rate from 35 to 15% (Edwards). These tax cuts have mainly benefited the wealthy, because they pay most of the taxes (Andrews). The wealthiest people in America paid the lowest tax rates since Herbert Hoover (Krugman “The Tax Cut Con”). A Congressional study confirms that the rate cut for top 1% of household earners was twice as deep as for middle-income families, and it translated to an average tax cut of almost $58,000 (Andrews). According to the economist Paul Krugman, the inheritance tax is only paid by 2% of the wealthiest Americans. (Krugman “The Tax Cut Con”) The capital gains tax and dividends tax is only paid by the wealthiest individuals. The benefits to the economy for the tax cuts have remained elusive (Krugman “Bush Tax Cut Mythology”). At the same time it has been noted that income inequality partly linked to the tax cuts for the wealthy has increased dramatically with an average CEO making 262 times as much as an average worker (Mishel). According to the Center on Budget and Policy Priorities, it was the combined effect of Bush tax cuts, the war in Afghanistan and Iraq, the stimulus packages, bailouts and reduced revenues that contributed to the huge budget deficit. (Ruffing and Horney) Without the fiscal policies of the previous administration and the economic downturn the budget would be in balance over the next decade. (Ruffing and Horney) As a result of the precarious budget situation, President Obama has announced to phase out tax cuts for married couples earning over $250,000, and individuals earning more than $200,000 (Ohlemacher) He also wants to end itemized deductions for upper-income Americans, close tax loopholes for managers investing in jobs overseas, and end subsidies for oil, gas, and coal companies. (Peter G. Peterson Foundation) However, the President has not precluded tax increases on the rest of the population (Calmes “To Cut Debt, Obama Shifts on No Tax Vow”).The reckless tax policies of the previous administration have been a major source for the budget shortfalls and the expansion of the national debt.
The increasing national debt will increase the interest payments on the national debt. Increases in the real U.S. debt stock associated with large fiscal imbalances could hamper foreign government monetary control and foreign capital formation. (Bundt) Interest payments on the national debt will increase, because a higher national debt requires the Treasury Department to issue IOUs with higher interest to keep borrowing into U.S. dollars attractive to foreigners. (McEachern 189). The hugest holders of U.S. Treasury bonds are China, Japan, the oil-exporting countries (Venezuela, Saudi Arabia, United Arab Emirates etc), United Kingdom and Brazil. (U.S. Department of Treasury “Major Foreign Holder of Treasury Securities”). China held $889 billion in treasury securities in January 2010, Japan held $765.4 billion (U.S. Department of Treasury “Major Foreign Holder of Treasury Securities”). The process of increasing interest payments required by lenders is called “crowding out”, because it reduces the scope for private companies and individuals to invest and consume, as higher interests lower the rate of return. (McEachern 188-189) For FY 2011 we are paying 6.7% of the total budget in interest payments (OMB 149) This proportion will increase to 15.8% by FY 2020 (OMB 149). The increasing interest payment on the national debt is a result of the budget deficits since 2002.
In conclusion, the U.S. national debt poses a huge problem on the national debt. It has largely been caused by the recent economic crisis, requiring forceful government investment in bailouts and stimulus packages, the increasing costs of the wars in Afghanistan and Iraq, the increasing cost on entitlement programs Medicare and Social Security, the irresponsible fiscal policies of the Bush administration and in smaller parts the Obama administration, and the interest payments on the national debt. Future generations of Americans are also harmed by the increased national debt and the unfunded Social Security and Medicare liabilities. (Darwin) Yet, it must also be noted that high domestic spending would not be too problematic if investments have gone to education or infrastructure, because they enhance the nation’s productivity. (McEachern 194-195) A report by the Center for American Progress suggests that discretionary spending would have to be cut by 51% to balance the budget (Ettlinger and Linden 3). Such deep cuts would be irresponsible. Former Labor Secretary Robert Reich even remarked that the debt scare is exaggerated, because future economic growth and some prudent policies will bring the national debt under control (Reich). The national debt is an extremely contentious moral, political, economic, and social issue that should be thoroughly reflected upon by lawmakers, who want to steer through the political process, and discuss solutions to political problems. The passage of the Statutory Pay As You Go Act that requires the federal government to make spending programs deficit neutral, or the Patient Protection And Affordable Care Act (health care reform) that is designed to be deficit neutral give hope that such a pledge is pursued. (CBO Director’s Blog)
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